Trade Alert: Red Dragon Stocks on Fire

It’s one of the biggest questions hanging over financial markets and the global economy right now:

Will the U.S. and China hammer out a trade deal or will there be no deal… ushering in more uncertainty for the world economy?

Over the past month, prospects have brightened that Washington and Beijing can get their act together. That expectation has propelled U.S. stocks much higher, with the Dow up over 10% so far this year.

But…

If you think that performance is good, just take a look at Chinese stocks.

Red Dragon stocks are on fire.

The Shanghai Composite Index gained a stunning 23.1% in January and February. A U.S. fund tracking China’s mainland stock market, the Xtrackers Harvest CSI China A-Share ETF (ASHR), soared 28% over the first two months of this year!

Could this big rally completely reverse if a trade deal falls through?

In short, no.

Trade alone isn’t the only reason why Chinese stocks are performing so well, or even the main reason. Yes, no deal on trade would take plenty of steam out of the rally, but it wouldn’t end it.

Here’s why.

I won’t say U.S.-China trade tensions are a nonissue for Chinese stocks. But the story definitely takes a back seat to a more fundamentally important story. The one about China’s market…

Money inflows, massive inflows

Last year, the largest keeper of global stock indexes, Morgan Stanley Capital Intl. (MSCI), made the momentous decision to add Chinese mainland stocks (known as A-Shares) to its popular MSCI Emerging Markets Index for the very first time.

There are trillions of dollars in global wealth tied to this index, so when MSCI makes a move, index-tracking investors must buy, and buy they did!

Investors poured $523.7 million into ASHR in the past four weeks alone!

This could only be the tip of the iceberg

A few weeks ago MSCI announced it will more than quadruple the weighting of China A-Shares included in the MSCI Emerging Markets Index by November.

This move significantly ups the ante for Chinese shares.

By some estimates as much as $125 billion of additional investor money should flow into A-Share stocks over the next eight months!

As an added bonus, Chinese stocks are a bargain right now with a price-earnings (P/E) ratio of just 12.1 in January. By comparison, the S&P 500 Index has a current P/E of 21, almost twice as expensive as stocks in China.

With over 30 years in this game… I’ve seen this story play out many times before

China’s stock market is volatile, with wide swings up and down.

In fact, five times over the past seven years, Chinese stocks have been as cheap as they began 2019.

And after each of those five times, China’s stock market surged by an average of 41% within the next year.

Earnings are winding down. The focus is shifting more to trade. Meanwhile, SoftBank gave the former CEO of WeWork quite the “golden parachute.” In international markets, the Japanese markets are surging while the European markets take a breather.

Amazingly, solar companies are still making money despite oil's big drop. Why? People across the world are investing in solar power to curb pollution. And it's getting cheaper every day. (Word to the wise: Chinese demand in particular will be insane).